1. Field of the Invention
The present invention relates to an electronic trading system. Particularly, the present invention is directed to a system for trading instruments, such as over the counter instruments or futures contracts, on an electronic exchange wherein trades are settled either bilaterally or cleared based on participant preferences.
2. Description of Related Art
The present invention relates generally to the trading of instruments such as over the counter instruments and futures contracts. Generally, such trades are arranged through bilateral contracts, i.e., the exchange of written agreements between counterparties. Recently, electronic markets have arisen to facilitate the trading of these instruments. In some circumstances, the trades may be consummated automatically if each counterparty informs the exchange of predetermined credit limitations, and the counterparties satisfy each other's respective limitations. While this method has generally been effective, the increased popularity of trading in these instruments (especially electronically) has created a need for more conventional trading method involving clearing trades through a third party clearinghouse.
Each method of trading, bilateral and cleared, has its own advantages. Bilateral trades are often favored where the parties have a pre-existing bilateral netting agreement, or where clearing a trade may be more expensive. On the other hand, it may be preferable to clear trades through a clearinghouse when one of the parties has reservations concerning the other party's credit worthiness and wishes to have the trade guaranteed by a third party. Current electronic exchanges have not accounted for these preferences. Therefore, there is a need for a system on an electronic exchange in which participants may set preferences to trade either bilaterally or cleared depending upon the circumstances. There is also a need for a system in which the exchange will automatically default to a preferred trading method. It is also desirable to show the products being traded in a single price stream, regardless of how the trade is settled. Thus, the details of the trade (e.g., price, quantity, etc.) should not be affected by the method of settlement. The method of settlement will only be determined at the time of trade confirmation. This system will streamline electronic trading of the products being traded.